Chinese steel producers face space, money shortages

China's steel producers face two looming problems as long as they maintain production with the coronavirus outbreak stalling demand and deliveries, as they run short of space to store steel and money to pay their workers.

Steel mills have tried to maintain output, targeting construction demand to return in early March. Steel stocks peak in late winter every year, but this year they are rising far above normal levels and forcing mills to get creative with their storage.

China's total steel inventories held by mills and trading firms rose by 13pc from the previous week to nearly 34mn t this week, according to industry data that includes rebar, wire rod, hot-rolled coil (HRC), cold-rolled coil (CRC) and plate.

Mills' steel inventories rose to nearly 13mn t in the week to 20 February, around 60pc higher than the previous five-year high in February 2017, a China-based analyst said.

Trading firms' warehouse steel inventories rose by 13pc to 21mn t in the latest week, exceeding the normal pace to peak at about 20mn t in late February or early March. Some warehouses in Shanghai have run out of space. HRC stocks in Lecong city, a HRC trading hub in south China's Guangdong province, have risen to more than 700,000t and above its warehouse capacity.

Driving the inventory growth is mills' reluctance to reduce output. But an Argus survey of mills found some mills cutting output by 10-50pc.

"We think demand for steel will largely improve from early March," said a manager at a Hebei mill that has reduced its output by 30pc. If sales do not improve, the mill may further widen its output cut to 40pc.

Qian'an city in Hebei province has been blocked off since 18 February because of an outbreak of coronavirus cases, including some at a steel mill. Restrictions have halved the city's steel output. Hebei's Tangshan is under 30-50pc blast furnace suspensions, with some mills operating normally while others have fully stopped, a Beijing trader said.

But the output cuts may not be widespread. Most mills will only reduce output if they have no choice, said market participants, with industry data suggesting overall cuts have been at the low end.

Data for a subset of mills showed a 2.5pc fall to around 8.8mn t output in the week to 20 February, or around 11pc below pre-holiday level, the China-based analyst said. The mills' rebar and HRC output fell, while plate and CRC increased slightly in the week.

Mills also face a cash crunch from the collapse in steel sales. China produces around 355,000 t/d of rebar and 470,000 t/d of HRC, which represents around 12bn yuan ($1.7bn) and Yn16bn respectively in potential revenue at current spot prices, Argus estimates. From these two products alone, mills face a combined Yn30bn in lost potential daily revenue as the coronavirus crisis prevents deliveries or the return of workers to restart construction sites and factories.

Mills are resorting to any financing means to obtain cash, including selling seaborne iron ore cargoes they are receiving under long-term contracts.

Beijing offers steel industry support

China's central bank late yesterday directed the steel industry to expand its direct financing, such as issuing debt bonds to ease financial pressures in the short term. Market participants were not impressed, saying the details of the rule are unclear, while the return of downstream demand is the solution to solving liquidity problems.

The China iron and steel association Cisa today encouraged mills to seek financial help from local governments like reduced taxes or bank interest rates. China's highest authority the state council said large-scale companies in Hubei can forgo paying insurance premiums from February to June to free up money.

Private-sector mills do not have the same financial resources as state-owned mills to survive the lean sales period, while they are not high on the list to get government aid during the crisis.

"Most private-owned mills have to rely on themselves to get through the hard time," said a north China trader. "There are too many sectors waiting to get support from government, and steel is unlikely to be the priority."